What happens when the wage rate of labor decreases temporarily?

When the wage rate of labor decreases temporarily, this leads to an increase in the short-run aggregate supply curve. This is because lower wage rates reduce the cost of production for businesses. When it is cheaper to employ labor, companies can produce more goods and services at every price level, which shifts the short-run aggregate supply curve to the right.

This increase in supply occurs in the short run as businesses respond to the reduced costs by increasing output to meet demand, which can help to lower prices and stimulate economic activity. However, the long-run aggregate supply curve, which reflects the economy's potential output when all resources are fully employed, remains unaffected by temporary changes in wages. Consequently, the correct response connects to this understanding of labor costs influencing short-run production decisions, without altering long-term economic fundamentals.